IT exporters adding revenue with fewer new employees

India’s $70 billion software exports industry is now generating every additional $1 billion in revenue with less than half the number of engineers it needed till 2003. Photo: HT

Updated: Mon, Nov 26 2012. 01 01 PM IST

Bangalore: For the first time in over two decades, India’s $70 billion software exports industry is now generating every additional $1 billion in revenue with less than half the number of engineers it needed till 2003—an early indication that the country’s top technology firms are earning more from high-end projects that require fewer people.

In 2003, when India’s software exports was worth just $9.5 billion, firms such as Tata Consultancy Services Ltd (TCS) and Infosys Ltd needed 37,798 engineers to earn $1 billion. In the year ended March, the industry added 19,783 people for every additional $1 billion in revenue, according to industry lobby Nasscom.

An increasing share of high-paying services that need fewer staff, a shift away from low-end, voice-based back-office services, and an overall slower demand for software services are bringing about this change. For nearly one million students set to graduate from engineering schools next year, it means fewer opportunities.

“This is a very progressive fact for the Indian IT (information technology) industry. This shows that the industry is doing a lot of things right, and that increasing maturity of the industry has also brought in a significant amount of pragmatism in the mix,” said Achyuta Ghosh, head of research at Nasscom. During 2008-12, software exports grew 14%, higher than the 9% growth in employees in the four years, the lobby group said.

Already, firms such as Wipro Ltd say staff needed to generate every $1 billion can be reduced further. Executives at some of the largest Indian software firms confirmed internal goals to bring down number of engineers required to earn a billion dollars to less than 15,000 in two-three years.

“We have been selling offshore development centres all our life. Now it’s time for innovations,” said Saurabh Govil, senior vice-president, human resources, Wipro.

Offshore development centres were dedicated facilities that housed hundreds, sometimes thousands, of engineers writing and maintaining software codes for customers such as General Electric Co. till a few years ago. These customers paid for services based on the number of hours billed by each engineer. Now, some customers are asking for payments to be linked with business outcomes and not the amount of manual effort.

“For the past 10 years, our industry has built campuses and other facilities, all focused on the supply side,” Govil said. “Now we are moving from managing demand to creating demand for our services.”

While Infosys has said it will earn one-third of its revenue from products and solutions that do not require additional staff in two-three years, TCS is already earning 10% of incremental business every financial quarter from services that are not dependent on the number of engineers.

“I am not saying that the current business model is bad. There’s nothing wrong in becoming a 500,000 people organization, but our investments in non-linear initiatives are equally important,” N. Chandrasekaran, chief executive of TCS, said in an interview in October.

TCS is betting on software platforms owned by its UK subsidiary Diligenta to win more business without adding fresh staff. Software platforms can be used over and over again for different customers, without adding any dedicated staff.

Phaneesh Murthy, chief executive of iGate Corp., said bringing down the number of people further for every $1 billion of revenue depends on the willingness of large customers to adopt these platforms. His company aims to achieve $3 billion in revenue by 2017, and Murthy hopes that at least 30% of that could come from iTops—iGate’s software platform.

“If that happens, we would be looking at revenue per employee of around $60,000, up from nearly $40,000 currently,” said Murthy.

To be sure, Indian tech firms’ efforts to reduce dependence on engineers are dwarfed by newer rivals such as IPsoft Inc. that are far ahead. For instance, IPsoft uses humanoids that automate and deliver IT projects at a cost that is less than one-fourth the billing rates of engineers. This year, IPsoft will cross $1 billion in revenue with less than 2,000 staff.

Experts tracking the sector said the proportion of fresh engineering graduates and those with less than three years of experience has been coming down for TCS and Infosys—two of the biggest software exporters.

The proportion of employees with less than three years experience has come down to 35% for Infosys and 40% for TCS, according to Kawaljeet Saluja, Rohit Chordia and Shyam M. of Kotak Institutional Equities Research. Both the companies had fresh engineers accounting for more than half their total workforce until 2006, the Kotak analysts said in their 16 November report.

For nearly three million employees in the sector, and for those aspiring to join these tech firms after they graduate, the changing profile of the industry raises some tough questions.

“Commoditized IT skills are taking us nowhere. Even arts and commerce graduates are now hired by Wipro, others. And they earn similar salaries,” said Akhilesh, who works as a software programmer with the Indian unit of International Business Machines Corp. He did not want his surname taken as he is not authorized to speak to the media.

“We speak to our college seniors from two years ago, and some of them are still not placed despite offers from Infosys etc,” said Shruti S., who is studying computer science at a Bangalore-based engineering college.

Nasscom said that despite increased focus on delinking revenue growth from fresh hiring, the industry needs in excess of 200,000 graduates every year.

“This trend of non-linearity and higher value-add and productivity effects will ensure the industry does not stagnate,” said Nasscom’s Ghosh. “There will be career paths in place, skill sets will keep evolving, and the industry will always look for new challenges rather than just remaining a commodity business.”